Jeft\'s Wanes, Inc. enters into a tease agreement as lessor on January 1, 2015,

Question

Jeft's Wanes, Inc. enters into a tease agreement as lessor on January 1, 2015, to lease an airplane to National airlines term of the non-cancelable tease is eight years and payments are required at the payment is made on Jan 1, 2015. The following information relates to this agreement:The estimated useful We of the airplane is 10 years with no residual value, and no bargain purchase option is contained in the tease. Title to the airplane will not transfer to National Airplanes. National Airlines will pay all executory costs related to the leased airplane. The airplane has a cost of $30,000,000 and a fair value of $30,000,000 on January 1, 2015. The annual lease payments of $4,562,337 allows Jeff's planes to earn an 8% return on its investment. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Jeff's Planes. Instructions J (a) What type of lease is this to National Airlines? Why?

Explanation / Answer

A- This is Capital Leae to National Airlines.

A capital lease is a lease in which the lessor only finances the leased asset, and all other rights of ownership transfer to the lessee. This results in the recordation of the asset as the lessee's property in its general ledger as a fixed asset. The criteria for a capital lease can be any one of the following four Conditions-

1- Ownership The ownership of the asset is shifted from the lessor to the lessee by the end of the lease period; or

2- Purchase option- The lessee can buy the asset from the lessor at the end of the lease term for a below-market price; or

3- Lease term. The period of the lease encompasses at least 75% of the useful life of the asset (and the lease is noncancellable during that time); or

4- Present value- The present value of the minimum lease payments required under the lease is at least 90% of the fair value of the asset at the inception of the lease.

If a lease agreement contains any one of the preceding four criteria or condition, then the lessee records it as a capital lease. Otherwise, the lease is recorded as an operating lease.

In given Case Period of Lease in 80% of economic life of assets and also Present value of Lease rental is 94% (28315552/30000000) of Fair value of assets hence said lease is Capital Lease for both Leasee and Lessor.

C- Amortization Schedule-

Year Lease Receivable Lease rental Interest Closing Bal. 1 $28,315,551.76 4562337 1900257.18 $25,653,471.94 2 $25,653,471.94 4562337 1687290.79 $22,778,425.73 3 $22,778,425.73 4562337 1457287.1 $19,673,375.83 4 $19,673,375.83 4562337 1208883.11 $16,319,921.94 5 $16,319,921.94 4562337 940606.795 $12,698,191.73 6 $12,698,191.73 4562337 650868.379 $8,786,723.11 7 $8,786,723.11 4562337 337950.889 $4,562,337.00 8 $4,562,337.00 4562337 0 $0.00

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